Effects of separating drug sales from treatment on medical disputes

For decades, the patient-physician conflict has been a persistent issue globally, particularly in China, where the situation has been deteriorating. To curb the inappropriate financial incentives of physicians, eliminate the practice of over-prescription, and improve the strained patient-physician relationship, the Chinese government has been implementing Separating Drug Sales from Treatment (SDST) in public hospitals since 2012. In this paper, we exploit the staggered difference-in-differences method and event study approach to examine the effects of SDST on medical disputes, based on administrative hospital-level annual data from 2011 to 2018 in G province. We find that SDST significantly decreases the number of total medical disputes by 10.0%, through reducing the over-prescription and medical malpractice, and improving hospital management practices and operational efficiency. This paper argues that removing the link between drug prescription and hospital revenue contributes to realigning physicians' financial incentives and thus building a healthy patient-physician relationship.